Will California Create A Bank That Serves Legal Cannabis Businesses?

Posted by Margolin & Lawrence on August 11, 2017

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One of the questions any Los Angeles cannabis lawyer encounters most frequently is: what about the banking issue? Cannabis remains a largely unbanked industry. And while you are still required to pay all of your federal, state, and local taxes, that often means dealing with large amounts of cash, which creates security and accounting risks for legal cannabis businesses. A stateside bank that services legal cannabis businesses could close some of these gaps, but still faces the risk of federal asset forfeiture.

On August 10th, the Cannabis Banking Working Group (CBWG) and California State Treasurer John Chiang held the last of six meetings in Los Angeles to address these concerns, as well as how a public bank that services legal cannabis businesses could generate revenue for the state. Since California is the world’s sixth largest economy, the way the state implements a banking system will be a bellwether for other states that have implemented medical marijuana regulations, as well as a game changer for legal cannabis operators in general.  

Kevin Klowden, economist and Executive Director of the Milken Institute, stated that in order for public banks to operate, they would need to generate a depository system that is specifically designated to cannabis businesses, creating a “safe alternative to an all-catch operation” which would be separate from the federal government. This public bank model would allow for small- and medium-sized deposits, turning them into targeted loans which could be used to make money. In order to do so, a public bank would require a master account number, similar to a routing number, which would assist in identifying the sources of funds and entities. This master account number would also allow for basic bank services, such as check deposits and transferring of funds. With federal oversight, the government would have the ability to oversee and approve such transactions. If money is coming from an institution that they have flagged as suspicious, e.g. cannabis businesses, they have the ability to block such transactions. To avoid this, the state would need to create a situation where the federal government cannot interfere with small deposits. The structure of such deposits must be separated and clearly distinct between any chartered public bank.

The Bank of North Dakota (BND), the only public state-owned bank in the country, has created a similar business loan program. The deposits made into BND are insured by the state, as opposed to the FDIC. Because BND has control over their institution, their default rate has been extremely low. As such, BND’s public bank model has proven to be effective and profitable. A program fitting this model, if adopted in Californiam could provide services to legal cannabis businesses. That said, as long as cannabis is classified as a Schedule I drug, the federal government can still intervene at any time. Nevertheless, implementing an alternative route for cannabis businesses to deposit their funds creates a “safe haven” for these businesses.

Public banking systems would create security plus opportunity, predictability, and sustainability for the primary stakeholders in California’s transition to a “new cannabis economy.” Unless the state of California handles cannabis currency first, private banks will continue to be reluctant to do so. The only “magic bullet” here, as Chiang mentioned in his opening remarks, is to remove cannabis from being classified as a Schedule I drug under the Controlled Substances Act altogther. However, that change seems to be a long way off. In the interim, though it will be complicated, there is growing momentum and consensus behind the need for a public bank that services legal cannabis businesses in California, and we’ve already seen that it is possible to create such a bank in another state.

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This blog is not intended as legal advice and should not be taken as such. The possession, use, and/or sale of marijuana is illegal under federal law.